Loans or Deposits from Members or Shareholders | Companies Act, 2013- Part-1

Loans or Deposits from Members or shareholders| Companies Act, 2013- Part-1

Companies are always in need of funds and it keeps on looking for various sources of funds such as share capital, Loans from banks or Financial institutions, loans from other persons etc. Issuance of shares involves a lot of compliances and it compromises shareholding as well. Similarly, loans from banks and NBFC is subject to detailed compliances, availability of mortgage or security and timely payment of interest and principal amount. Therefore, companies prefer acceptance of loans from other persons.

However, Companies Act, 2013 have made acceptance of loans from the general public or members more stringent and complied. Companies are required to follow provisions of Companies Act, 2013 before and after acceptance of such loans.

Provisions related to acceptance of deposits are given in Chapter V-Acceptance of Deposits by Companies of Companies Act, 2013 read with The Companies (Issue of Global Depository Receipts) Rules, 2014

This article discusses in detail provisions related to acceptance of Deposits from members or the public.

1. Meaning of Deposits

  • As per Section 2(31) of Companies Act, 2013, Deposits include any amount received by way of deposit or loan or in any other form by a company. 

2. Transactions not considered as Deposits

As per per Section 2(31) of Companies Act, 2013 read with Rule 2(c) of The Companies (Acceptance of Deposits) Rules, 2014, following transactions shall not be considered as Deposits:

  1. any amount received from the Central Government or a State Government or amount received from any other source whose repayment is guaranteed by the Central Government or a State Government;
  2. Any amount received from a local authority or statutory authority;
  3. Any amount received from foreign Governments, foreign or international banks, multilateral financial institutions etc.
  4. Any amount received as a loan or facility from any banking company;
  5. Any loan or or financial assistance received from Public Financial Institutions;
  6. Any amount received against issue of commercial paper or any other instruments;
  7. any amount received by a company from any other company;
  8. Any amount received and held towards subscription to any securities, including share application money or advance towards allotment of securities pending allotment, so long as such amount is appropriated only against the amount due on allotment of the securities applied for;
  9. any amount received from director of the company or a relative of the director of the Private company. However. Director or relative is required to give a declaration that such amount is not given out of funds acquired by him by borrowing or accepting loans or deposits from others.
  10. Amount raised by issuance of bonds or debentures secured by a first charge;
  11. Amount received from an employee of the company not exceeding his annual salary under a contract of employment with the company in the nature of non-interest bearing security deposit;
  12. Any non-interest bearing amount received and held in trust;
  13. any amount received for the purpose of business of company as:
    • Advance against supply of goods or services. Such advance is required to be appropriated against supply of goods or services within a period of 365 days from the date of acceptance of such advance.
    • Advance against consideration for an immovable property under an agreement or arrangement. Such advance should be adjusted against such property in accordance with the terms of agreement or arrangement;
    • Security deposit for the performance of the contract for supply of goods or provision of services;
    • Advance received under long term projects for supply of capital goods
    • Advance received for providing future services in the form of a warranty or maintenance contract. However, period of providing such services does not exceed the period prevalent as per common business practice or five years, whichever is less.
    • Advance received and as allowed by any sectoral regulator or in accordance with directions of Central or State Government;
    • Advance for subscription towards publication, whether in print or in electronic to be adjusted against receipt of such publications;

However, amount specified in (i), (ii) and (iv) above becomes refundable due to non-availability of necessary permission or approval, then the amount received shall be deemed to be a deposit under these rules:

  1. Amount brought in by the promoters by way of unsecured loan in pursuance of the stipulation of any lending financial institution or a bank subject to fulfillment of the following conditions, namely:-
    • the loan is brought in accordance with conditions imposed by the lending institutions on the promoters to contribute such finance;
    • Loan is provided by the promoters themselves or by their relatives or by both; and
    • the exemption under this sub-clause shall be available only till the loans of financial institution or bank are repaid
  1. Any amount accepted by a Nidhi company in accordance with the rules made under section 406 of the Act.

3. General Prohibition on Acceptance of Deposits

  • Section 73(1) of Companies act, 2013 prohibits company from acceptance of any kind of deposits from the Public.
  • However, provision of Section 73 are not applicable to:
    • banking company;
    • Non-banking financial company; or
    • Such other company as the Central Government may specify on this behalf.

4. Conditions for acceptance of deposits from Members

Provisions related to acceptance of deposits from members are given in Section 73(2) of Companies Act. A company may accept deposits from its members on such terms & conditions as may be agreed between the company & the member. However, such deposit can be accepted subject to fulfilment of following conditions:

a. Pass a resolution in General Meeting of the company

b. Issue Circular to the member (Sec. 73(2)(a))

  • The company shall issue a circular to the member inviting deposits from them. 
  • The circular shall includes a statement containing –
  1. Financial position of the company;
  2. Credit rating obtained by the company;
  3. Total number of depositors and amount due towards previous deposits accepted by the companies;
  • Circular is required to be issued in Form DPT-1 by registered post with acknowledgement or speed post or electronic mode.
  • Copy of such circular shall be uploaded on website of the company;

c. Filing of circular with RoC

  • The circular, along with the statement, shall be filed by the company with the registrar, at least 30 days prior to the issued of the circular to the members.

d. Transfer of funds to Deposit repayment reserve account 

  • The Company is required to deposit a minimum 20% of the deposits maturing during the financial year in a separate bank account maintained in a scheduled bank in name of “Deposit Repayment Reserve Account”.
  • Such amount shall be deposited on or before the 30th day of april each year.
  • Funds lying in such an account shall be utilised for repayment of deposits only.

e. Certificate of no default in repayment of deposits

  • The company shall certify that it has not defaulted in repayment of any deposit or any interest thereon
  • However, where a company has defaulted in repayment of any deposits or interest thereon, the company has made good the default and a period of 5 years has lapsed since the date of making good the default.

f. Security w.r.t deposits or creation of charge

  • The company may provide security for the repayment of deposits and interest payable thereon, and create a charge on its assets for the purpose.
  • However, If the company does not secures the deposits or secures them partially then such deposits shall be referred as ‘unsecured deposits’ in every circular or document.

5. Applicability of Deposit related provisions on Public Company or Private Company

  • Generally, Provisions of Section 73 are applicable to both Public Company and Private Company.
  • However, as per exemption given under GSR 464(E) dated 05.06.2015 amended by GER 583(E) dated 13th June, 2017, conditions given under Section 73(2)(a) to (e) shall not apply to private company.
  • Further, Provisions of Section 73(2)(a) to (e) shall not apply to specified IFSC Public Companies  which fulfill the following criteria:
    • Which accepts deposits from its members monies not exceeding 100% of Paid up share capital and free reserves; and
    • Such companies shall file the the details of monies so accepted to the Registrar in such manner as may be specified; or
  • However, exempted private companies are also required to file details of money accepted to RoC in form DPT-03.

6. Acceptance of Short-Term Deposits from Members

  • As per Rule 3 of The Companies (Acceptance of Deposits) Rules, 2014, no company shall accept or renew any deposit from its members which is:
    •  repayable on demand; or 
    • Repayable upon receiving a notice within a period of less than 6 months or more than 36 months from the date of acceptance or renewal of such deposit.
  • However, company may accept short term deposits, repayable within 6 months from date of acceptance of deposits, for short term requirement of funds subject to the condition that-
    • Such Deposit shall not exceed 10% of aggregate of the Paid-up share capital, free Reserves and securities premium account of the company, and
    • Such deposits are repayable not earlier than 3 months from the date of such deposits or renewal thereof.

7. Threshold Limit of Deposits from Members

  • No company shall accept or renew any deposits from its members, if the amount of such deposits together with the deposits outstanding on the date of acceptance or renewal exceeds 35% of aggregate of the Paid-up share capital, free Reserves and securities premium account of the company.

8. Rate of Interest of Deposits

  • As per Rule 3 of The Companies (Acceptance of Deposit) Rules, 2014, No company shall invite or accept or renew any deposit carrying a rate of interest or pay brokerage at a rate exceeding the maximum rate of interest or brokerage prescribed by the Reserve Bank of India for acceptance of deposits by non-banking financial companies.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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Apart from Loans from Banks and NBFCs, companies do have options to borrow funds from shareholders or members. However, since funds are involved of the shareholders, therefore, company law contains detailed provisions related to loans and deposits from Member or shareholders. Companies are required to follow detailed procedure to obtain deposits and also are required to repay the same within committed time.

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